Earnings season is reaching the peak of its excitement with almost 1,000 public companies reporting their 2nd quarter results this week. Apple AAPL is releasing earnings tomorrow after the bell and is one of the most anticipated reports of the season. Can Apple curb its iPhone sales decline, and how will they approach the smartphone maturing industry moving forward?
AAPL is a big mover on earnings with the last 8 earnings resulting in a 5% price action on average (6 out of 8 being positive). Apple analysts are estimating a June quarter EPS of $2.10, which would represent an over 10% year-over-year (YoY) decline. Sales are expected to be $53.3 billion, which would illustrate less than 1% YoY growth.
Apple has beaten top and bottom-line estimates every quarter for the past 3 years. A miss on either metric will likely lead to a price decline. Look for management guidance and sentiment to drive this stocks price action post-earnings.
iPhone sales are expected to demonstrate its softest numbers in 2 years as the smartphone industry reaches a level of maturity. Apple’s topline has historically been driven primarily by its iPhone revenue, but demand is slowing. People are much slower to update their devices as generational changes become increasingly marginal. Apple is pricing its premium iPhones above any prior generation, keeping some customers at bay.
You look around you at any busy intersection, and you will see 75% of the humans standing there on their smartphones and a majority of them using an iPhone. People are already satisfied with their current iPhone and aren’t willing to spend $1,000+ for something that is functionally the same.
The decline in iPhone sales has been partially offset by robust double-digit growth in iPads, Wearable, Home and Accessories segments (AirPods, Apple Watch, etc.), and services (Apple Music, Apple Pay, licensing, etc.).
Big Bet On 5G
Apple is now focusing on the next generation of iPhone that will revolve around the expanding 5G infrastructure that marks a new generation of smartphones. Apple and its competitors are hoping that 5G will reignite smartphone sales back into growth as consumers see a need to update.
Apple wants to control as much of their next-generation iPhone’s development and production as possible. The firm is in the midst of late-stage talks with Intel to acquire its modem chip business, a move that would give Apple further vertical integration. Apple is making a big bet on 5G with this potentially $1 billion deal.
Look for further color on the Intel deal in the earnings call tomorrow at 5:00 pm eastern.
Apple just recently acquired $600 million worth of assets from Dialog Semiconductor last year, its second-largest recorded acquisition behind the $3 billion Beats deal in 2014. The assets acquired expanded Apple’s exposure to their battery-management chip production and development.
I am sure the earnings call will touch on what kind of cost advantages can be expected with next-generation development being done in-house. Growth in licensing revenue could also be a driver as, the number of patents owned by Apple increases.
Recent Performance & Valuation
Despite declining iPhone sales, AAPL has been able to outperform the market so far in 2019 with a 33% share appreciation. AAPL has been able to outperform every other FAANG stock AMZN, NFLX, GOOGL this year except Facebook FB.
Attributing to a large portion of AAPL’s recent growth was its aggressive stock repurchase program, which outpaces any other company in the US. The company has repurchased roughly 30% of its shares back since 2012, and it is in the midst of a $175 billion buyback program.
Apple only spent $14 billion on R&D last year, just a fraction of what it spent on repurchasing stock. This leader in tech needs to set a precedent in the space that the development of new technology and advancing the human race is more important than short-term shareholder returns.
AAPL is currently being valued at 16.5x forward P/E, on the highest end of its 5-year P/E range which has been between 9.6x and 17.3x.
Sell-side analysts have target prices between $150 and $250 with AAPL currently trading at $210.24. Shares are trading roughly 10% off its 52-week highs.
iPhone sales are declining and expecting to continue this downward momentum. Apple’s big bet on 5G is expected to propel this company’s largest topline driver back into growth. Keep your ears peeled for any color on a release date for its 5G products and what increased in-house development means for costs.
With every earnings for 3 years beating top and bottom-lines I would expect the same for this report. As always, make sure you focus on management’s forward guidance and sentiment in the earnings call. The earnings call could reveal further concerns that the market has about the firm moving forward.
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